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Currency Headwinds Blowing Strong

Study finds currency fluctuations had negative impact on revenue for more than 25 percent of multinationals, with average 3-cent impact on EPS among affected companies.

Foreign exchange (fx) advisory firm FiREapps analyzed the earnings calls of 800 large multinational companies; each company included in the study makes at least 15 percent of its revenues internationally, in at least two currencies.

Among these businesses, 213—or 27 percent—reported that currency fluctuations had a negative impact on their revenues in the first quarter of 2013. That number is down from Q4/2012, but it’s still much higher than the number of companies reporting currency headwinds in 2011. (See Figure 1.)

Ninety-seven of these companies quantified the impact of currency fluctuations on their revenues in the first quarter of 2013. The impact totaled US$3.67 billion, or 1.11 percent of revenue on average. Among the companies that disclosed the impact on earnings per share (EPS), the average EPS impact was US$0.03.

“Considering that fx managers from leading multinationals increasingly have MBOs (management objectives) of no greater than 1-cent EPS impact from balance sheet exposures alone, an average 3-cent hit to EPS is large and material,” says FiREapps CEO Wolfgang Koester. “Currency impacts alone made companies miss their low end of EPS guidance. That EPS impact brings home the point that without good currency risk management, EPS remains at risk.”

The two currencies mentioned most frequently as impacting earnings last quarter were the yen and the Venezuelan bolivar. Eighty-nine companies reported negative impacts from the yen, and 43 reported negative impacts from Latin American currencies, while only 25 reported negative impacts from the euro.

Japanese prime minister Shinzo Abe began to devalue the yen shortly after taking office in December 2012. In the six months since, the yen has fallen almost 30 percent relative to the U.S. dollar. “The yen slide has set off a competitive devaluation race to the bottom, as an increasing number of countries have felt forced to get into the currency war,” Koester says. “That’s in order to maintain the relative competitiveness of their exports. One area in which yen devaluation has ignited a competitive devaluation race to the bottom is Latin America.”

FiREapps does not anticipate a change in currency volatility anytime soon. “Looking toward the rest of 2013 and the first half of 2014,” Koester says, “the yen will continue driving competitive devaluation and currency battles around the world. CEOs and CFOs need to prioritize currency exposure management because investors know that if a company has fx impacts greater than 1 cent of EPS, the company is not managing currency risk to the market standard and is therefore likely to have continuing fx surprises.”

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